Diversification is one of those words money managers seem to toss around like dentists do the word floss.


For ICM Asset Management Inc., however, the term isnt about the makeup of an investment portfolio so much as an internal business strategy to help the Spokane-based money manager survive what it believes will be an inevitable shakeout in its industry.


The 22-year-old company, which parlayed a strict focus on small-cap companies into a national reputation and a $2.2 billion management portfolio, has, in recent years, begun diversifying in two new strategic directions. It has shifted vertically up the investment ladder by broadening its focus to include large-cap companies and the bond market, and has stretched its small-cap value expertise horizontally by helping startups begin their search for capital, says founder and President Jim Simmons.


We had no choice but to diversify, Simmons says. Its impossible to be a Johnny One Note.


The Spokane company hopes to buttress its vertical move soon. Simmons says hes close to announcing an agreement to buy another money-management firm, located elsewhere in the country, that focuses on large-cap stocks. ICM entered that market in 1998 by acquiring Reardon, Rivard & Associates Inc., a money manager here owned by the parent of Washington Trust Bank, of Spokane. Also, last year ICM joined with a Chicago company to form ProManage Inc., which provides a system to manage individual investment accounts within employee retirement plans such as 401(k)s. ICM is now majority owner of that Chicago venture.


As for its horizontal move, ICM completed its acquisition late last year of Portland-based Redchip.com, a specialized investment research firm that focuses on overlooked small-cap companies and also does investor relations for some such concerns. That acquisition complements both ICMs Raven Ventures LLC affiliate, which helps startups prepare for getting their first significant injection of capital, and Raven Venture Capital Partners LP, a small venture-capital fund headed by Simmons that has invested in five companies, four of which are in the Inland Northwest.


ICM hasnt forsaken its focus on small- to mid-cap value investing, though. That strategy earned it ninth place among domestic equity managers in a ranking by the Pension & Investments trade magazine for the first quarter of this year, and 10th for the 12 months ending March 31. In another recent ranking, Investor Force, a research organization that provides information to institutional investors, ranked ICM third among mid-cap value managers for that same period.


Small- and mid-cap companies generally are considered those with market capitalizations (price per share times shares outstanding) of less than $5 billion, though the average market cap of the companies ICM invests in for its clients is about $1.6 billion. Value investing is a strategy in which the investor buys the stocks of out-of-favor companies at what are believed to be low share prices and later sells them when their prices reach predetermined levels.


The recent rankings were based on ICMs first-quarter return of 13.37 percent in its small- to mid-cap value strategy, and 30.42 percent annualized return over the past three years ending March 31. By comparison, the benchmark Russell 2500 Value Index returned 8.51 percent and 16.64 percent for those two periods, respectively.


ICMs small- to mid-cap value investing portfolio suffered some in the second quarter, but was still up 5.48 percent for the year at the end of June. Still, the much-watched Dow industrials had fallen nearly 7 percent for the year by then, and the broader Standard & Poors 500 was off 13 percent.


The past few weeks havent been kind to the markets, however, and as of July 15, ICMs small- to mid-cap value strategy had fallen into the red, with the rest down 8.5 percent for the year, though still ahead of the Dow and S&P.


A late 90s shift


ICM began its vertical diversification in the latter 1990s, when it faced an interesting dilemma for having broken the $1 billion mark in managed assets. Because ICM liked to keep just a few dozen stocks in its small-cap portfolio, and because those stocks inherently had small market capitalizations, it became difficult to take on more assets without overweighting any individual stock.


In two distinct moves, ICM began moving up the ladder first into mid-cap stocks, and then, with the acquisition of Reardon Rivard, into large caps and bonds, the latter of which allowed it a fixed-income component for its clients. Those diversifications enabled ICM to grow its management portfolio significantly, topping $2 billion and making ICM one of the largest money managers in the Pacific Northwest.


Now, Simmons believes that management portfolio is going to have to grow significantly for ICM to prosper as the asset-management industry contracts.


In a bull market you get too many money managers, says Simmons. That leads to intense competition among managers, who are forced to lower fees to compete then hope for a larger volume of assets under management to stretch that lower margin.


There will be consolidation, he says. Money management will be a very challenging time in the next few years.


Still faced with the same dilemma of growing a small- to mid-cap investment base further, ICMs future growth in managed assets will come through its medium- to large-cap and fixed-income portfolios, Simmons says.


Thats why its pursuing the acquisition of the large-cap money manager. There really isnt any alternative to stay healthy, he says. I dont think we can afford to be narrowly focused.


Its also why marketing ICM is a challenge, since the longtime company is best known for its small-cap expertise, says Simmons, who will log more than 150,000 air miles this year talking to clients and potential clients.


Many of ICMs clients now are big institutional investors, including corporations, pension funds, endowment funds, and government funds, though it also serves high-net-worth individual investors.


For a time, that latter category of clients was a growth sector for ICM, as it built relationships with brokerages nationwide to feed it new customers. By 1998, those efforts pushed ICMs client base up to about 2,000 clients, though that level plummeted to about 850 in the following year or two as one big brokerage relationship ICM had established deteriorated when small-cap stocks cycled downward and the brokerage began touting other investment strategies. Since then, ICM has added about 150 clients, though they represent more of a mix of institutional and individual investors.


ICMs other strategic shift came about partly because of Simmons increasing interest in helping the Inland Northwests economy grow. He founded Raven Ventures in 2000 and assembled a collection of business startup experts to provide management to entrepreneurial ventures that need to seek capital. He also created a venture-capital fund, currently funded at about $2.5 million, that has invested in companies to which Raven is providing management help.


Among Ravens clients are Isothermal Systems Research Inc., of Clarkston, Wash.; Purcell Systems Inc., of Spokane; and Aluminum Chambered Boats Inc., of Bellingham, Wash. Both Isothermal Systems and Aluminum Chambered Boats have said they are considering Spokane operations. (See story on Isothermal, on page A1.)


Raven will grow, says Simmons, as investment capital in the community becomes more available, which he says is critical to Spokanes economic future. He says hed like to see the Raven venture fund swell to $5 million, and that other venture-capital funds in the community also grow.


Raven continues to get many inquiries from hopeful entrepreneurs here who need help getting capital, but has chosen to work with few because most lack a marketable product or will need a lot more money than is realistically attainable in these times and in this region. The fact is that $5 million is very hard to get right now, Simmons says.


Meanwhile, ICM is still in the process of merging corporate cultures with its new RedChip.com unit, which publishes investment research on small, overlooked companies (usually with market caps of less than $150 million) in a publication called the RedChip Review.


ICM currently employs 55 people at its offices in the Washington Mutual Financial Center downtown, as well as another six employees there who work for Raven Ventures. Its RedChip.com subsidiary employs between 25 and 30 people, mostly in Portland, and the ProManage venture in which it has a majority stake employs about 10 in Chicago.